What's new
　　Towngas China announced on December 3 that it entered into an equity transfer agreement with its controlling shareholder, the Hong Kong and China Gas Company （HKCG） （003.HK）。 According to the agreement, the firm would acquire equity interests in all the 31 smart energy companies held by HKCG, which have a cumulative attributable net asset value of around Rmb497mn, for an aggregate consideration of Rmb509mn. The acquisition constitutes a connected transaction of the firm, but is exempt from independent shareholders’ approval due to the low consideration. The 31 smart energy companies are all project companies established in China with businesses covering photovoltaics （PV）， energy conservation, charging and zero carbon smart cities in the People’s Republic of China.
　　Specifically, 16 of these project companies have obtained capital injection and started normal operating activities, achieving a combined attributable net profit of about Rmb4.53mn in the first 10 months of 2021. The remaining 15 project companies have not started operation and would be transferred to Towngas China as companies without any assets.
　　Comments Injection of related assets from the parent company in line with new
　　strategic positioning. On October 25, 2021, the Board of Towngas China announced major decisions including: 1） The firm plans to transform itself into a comprehensive energy firm with focus on technology and innovation. 2） The firm reshuffled its Board of Directors, naming Dr. Lee Ka Kit as Chairman of the Board of Directors and Dr. QIU Jian Hang as Chief Operating Officer, responsible for the renewable business. 3） The firm plans to issue HK$2.8bn worth of new shares and convertible bonds to the strategic investor Affinity Equity Partners for investment in the smart energy business. 4） The firm was renamed Towngas Smart Energy Company Limited on November 26. In our view, the acquisition of equity interests in all the smart energy companies under the parent company will help eliminate concerns about potential competition between the firm and the target companies in the new energy business and is in line with the firm’s positioning as the sole platform to operate the smart energy business under the group.
　　City gas and smart energy businesses to drive high growth. We
　　believe that Towngas Smart Energy will strengthen rather than abandon its traditional city-gas business under the new strategy to create synergies.
　　We expect the firm to rapidly enter and expand the smart energy business and advance industrial and commercial distributed PV projects given its advantages in client base in industrial parks. We believe that Towngas Smart Energy will grow rapidly by operating the two businesses through two subsidiaries, namely, Towngas China Energy Investment Limited （TCEI） and Towngas China. We expect TCEI to become a leading distributed PV firm during the 14th Five-Year Plan period, and increase its installed capacity of industrial and commercial distributed PV projects to 15GW with a market share of 12% in China by 2025. We expect TCEI’s installed capacity of PV projects to reach about 300MW by end-March 2022. In addition, we expect Towngas China to accelerate its growth during the 14th Five-Year Plan period. The firm sets a target in its equity incentive scheme to achieve a CAGR of 25% in gas sales volume （including Shanghai Gas） over the next four years, and revenue CAGR of more than 30% for the extended business, much faster than the historical average.
　　Valuation and recommendation We leave our earnings forecasts and TP of HK$6.2 unchanged,
　　implying 11x FY21e and 10x FY22e P/E with12% upside. We maintain an OUTPERFORM rating. The stock is trading at 10x FY21e and 9x FY22e P/E.
　　Risks
　　Slower-than-expected smart energy business growth; equity dilution from follow-on offering; disappointing gas volume growth and/or dollar margin.